This Weeks Economic Update, January 9, 2023

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Welcome to 2023.  For those who made new years resolutions and have kept them, Congratulations, good job, keep it up.  For those who made no resolutions, Congratulations, you have achieved your goals, way to go.  For those who made your new years resolutions and have already broken them, Congratulations, you are human and that is A-OK.  You have the opportunity to reset the resolutions and have learned from a past failure to achieve them this time. 

Any well-run organization holds to the truism that the right hand knows what the left hand is doing.  This provides for an efficient operation where duplication or even offsetting actions are not occurring.  Sadly, our government seems not to understand this basic concept.  While the Federal Reserve continues to attempt to fight inflation by increasing interest rates, our Legislative Branch continues to spend aggressively.  In the past year Congress has passed two huge spending bills which counter much of what the Fed has been trying to do.  The outcome here is that the Fed will likely have to raise rates higher and for a prolonged period of time to tame the economy and bring inflation to the targeted levels.

How far are we from controlling the rate of inflation?  It is hard to say, however, it does appear we are past peak inflation.  That seems to have been reached sometime last Summer.  However, we are still running hot at about 4.8% based on a month-to-month average for the past 12 months.  The most recent jobs report indicated that wage inflation may have peaked in July and is rising at a slower rate.  It is still high compared to pre pandemic levels, but this is expected based on the inflation and the tight labor market.  To get down to the Fed target of under 2% will take a while.  It took the Volker Fed over 8 years to wring out the inflation of the 1970’s.  The low hanging fruit of passing the peak is done.  To impact the economy to reach 2% requires a lot more activity in terms of both interest rate increases and the duration of the high rates.

That brings us to the most recent jobs report.  Companies continue to hire at a steady rate.  Unfilled jobsopenings remain high.  New jobs on a monthly basis have been at the pre pandemic rate for over six months now.  The labor participation rate is now at 62.3%.  Prior to the pandemic the level was 63.3%.  Essentially, we are down 1% since 2019.  Breaking down the participation rate is very interesting.   The participation rate for all women was 57.8 prior to the pandemic.  Now it is 56.8, again a drop of 1%.  For all men the rate was 69.2% and now it is 68.1%, not far off the 1% drop.  So, the difference is not related to sex. 

Looking at the age grouping, we find the participation rate for all people 24-55 currently at 82.4%.  Pre pandemic the level was 83%.  We lost .6% in this category.  Over the past year though, this has been rising quickly.  By mid-2023 it is expected that we will be back to 83% in this category.  Obviously, this group cannot be sustained on unemployment and other government programs indefinitely so as benefit programs fade, this group will come back.

The labor participation rate for those over age 55 in 2019 was 40.3%.  Today it has fallen to 38.8%, 1.5%.  This group appears to have retired and is not coming back to the labor force.  While they saw a hit to their retirement early on in the pandemic, the market came back.  They also were able to receive enough stimulus funding, including offsets to health insurance premiums to a point they feel comfortable not working. 

To get to a pre pandemic level of over all labor participation, it will require a higher level of activity by that group in the 24-55 age group.

The ISM manufacturing report for December showed slippage in the activity.  The report fell from 49 in November to 48.4 in December.  This is the fourth monthly decline.  What is odd is that the employment level in Manufacturing increased from 48 to 51.  Part of the increase relates to specific industries working to catch up on back logs now that supply chain issues have eased.

The ISM Service number is much more concerning.  This was an area that was expected to rise.  However, the surprise here is that not only did it slip lower than the November growth level, it actually fell from 56 to 49.5 which indicates contraction.  Housing related services appear to be impacted by the interest rates leading to fewer construction starts.  Education services are being hit by both higher interest rates and affordability.  It also appears to be impacted by the job market; job applicants can find the job they want at the increased wage they want without extra education.  Banking services are being impacted, primarily in the mortgage area. Overall, consumers appear to becoming more conservative with their purchases as they see service sector price increases.

Have a great week.



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